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Manufacturers are confronting a number of complex business risks and disruptors, which are creating, in turn, a pressing need for the industry to evolve their risk assessment capabilities, according to a study from the Manufacturers Alliance for Productivity and Innovation (MAPI) and Deloitte & Touche LLP.

Based on the results, the study anticipates that some of the top business risks three years into the future will be product design and innovation; transforming the business model to access emerging sources of demand; and dealing with pricing and margin pressures that result in cost constraints. From an Information Technology (IT) standpoint, top risks for manufacturers are expected to include cyber security risk management, mobile device security and cloud computing risks.

The study explores how manufacturing companies are assessing and responding to such risks and finds that the current operating environment demands that manufacturers should continue to evolve their capabilities to be more analytical, agile and data-driven in their assessment of risk to handle the complex events and disruptions that manufacturers face. “During the last few years, many manufacturers have started to embrace approaches to assessing the external risk environment,” says Brian Clark, a Deloitte Advisory partner at Deloitte & Touche LLP, and co-author of the study. “Continuing to shift the risk focus from execution-related topics, such as how to implement strategy, to greater analysis of the external environment can enhance the company’s risk understanding and deliver greater insight about what’s happening with customers, competitors and disruptors in the marketplace.”

The quickening pace of technological advances, in particular, presents significant challenges to risk professionals in the manufacturing industry. Analytical tools and predictive modeling capabilities enable manufacturers to extract more meaning and direction from massive data sets. Cloud computing enables manufacturers to more fully benefit from robust IT capabilities without having to maintain related software, hardware and infrastructure in house.

“The pace and impact of innovation, coupled with intensifying cybersecurity risk, create a risk environment for manufacturers that requires careful management,” says Trina Huelsman, vice chairman, U.S. Process and Industrial Products Industry Leader, and Deloitte Advisory partner at Deloitte & Touche LLP, and co-author of the study. “Given significant investments in innovation in the age of the Internet of Things, many companies are expanding their risk management practices to address the related risks. For instance, many manufacturers are broadening their assessment of cybersecurity risks beyond core financial systems and networks to include evaluation of cyber risks in automated manufacturing processes, embedded product technologies and sensitive data protection around large scale analytics solutions. For manufacturers to thrive in the changing risk landscape, a company’s risk assessment practices should anticipate and respond to those changes,” Ms. Huelsman adds.

Risk Assessment Techniques

Executives and boards should regularly be asking themselves whether the risk assessment techniques currently employed can identify and assess tomorrow’s top risks. Ultimately, it is a question that can only be answered within the context of the culture and capabilities resident in the company.

However, the study data suggested that manufacturers may be hard pressed to analyze and understand rapidly evolving risk environments as they’re only generally assessing risk annually or semiannually with 87% of manufacturers spending less than 500 hours doing so.

Spending time understanding risk is even more important in the emerging strategic risk domain. Strategic risks may be the most crucial risks facing manufacturers, providing the possibility of both great upside and downside. Organizations should consider how well their current risk approach identifies and assesses such risks. One approach that can be taken involves linking key risk indicators to underlying business assumptions during the strategic planning process, thus providing an early warning system if core business assumptions are proving untrue.

Among the most effective practices, survey respondents reported leveraging stakeholder interviews, presentations of specific risk topics to the board, and integrating the risk assessment with the strategic planning process as ways to enhance assessments and support a risk-aware culture. In addition, regular attention from a board risk committee, a chief risk officer or other champion and internal audit can help embed risk thinking into a manufacturer’s business culture.

“Organizations should establish a risk assessment program that fits into its unique culture and risks. Since change is constant and can occur suddenly, ongoing efforts to enhance the sophistication and variety of risk assessment techniques are needed,” says Leslie Miller, director of the Internal Audit Councils and deputy general counsel of MAPI.

Less effective practices noted by the survey participants include risk questionnaires or surveys that are too long or sent to too many people, accepting generic or repetitive risk mitigation responses and risk assessments that are too narrowly focused.

In improving risk management and risk assessment practices, manufacturers can consider the following:

—Is once a year enough for risk assessments to keep key risks top of mind?

—What is the board and executive management’s expectations in developing and effectively monitoring risk indicators?

—Should a management-led risk council be established to foster a stronger dialogue on risk?

—What data is available and what are the hurdles to overcome in collecting relevant data regarding risk events and expected impact?

—Does the organization spend sufficient time analyzing the external views of the organization’s risks?

Embedding risk management practices throughout the organization makes identifying and responding to vulnerabilities part of the business culture. Based on an organization’s unique circumstances, current practices should be challenged to determine whether there are more efficient or more complete ways to gather risk information to enhance the periodic assessment.

“Thinking back to the industrial revolution, risk management is something that many manufacturers have been very good at for some time,” says Mr. Clark. “There is value, though, in today’s competitive environment, to be great at risk management and to do so, the assessment techniques need to evolve as fast or faster than the business landscape itself. It will require a willingness to invest, experiment and innovate with risk management just as manufacturers are doing with their products, processes and business models. If the past is any indication, innovation will occur,” he adds.

About the Survey

The survey was commissioned by Deloitte and MAPI, a member organization focused on building strong leadership within manufacturing, and driving the growth, profitability and stature of global manufacturers. Respondents consist of 68 members of MAPI’s Internal Audit and Risk Management Councils, and the majority of respondents range in revenue size of $1 billion to $10 billion in annual revenue.

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